IPO is not a great deal for PE investors in Bharti Infratel

The initial public offers (IPOs) always remain the first and the best exit route for private equity (PE) investors. However, PE investors in Bharti Infratel have nothing to cheer when Bharti is launching one of the largest IPOs in India to raise about Rs 4,500-crore this month.

The largest private equity investors - Temasek, KKR, Goldman Sachs, AIF Capital, Citigroup - had made investments of $1.25 billion in 2007, by acquiring 14 per cent in Bharti Infratel at a price of Rs 220 apiece. However, the fact that the price of Rs 210-240 for the shares of Bharti Infratel will never offer a decent margin for their five-year-old investment in the domestic telecom giant, has pulled the investors back from participating in the proposed IPO.

Bharti Infratel plans to raise Rs 4,500 crore through the IPO.

The four PE investors selling part of their stake in the IPO are Compassvale Investments, an arm of Temasek which holds 5.17 per cent, KKR Towers Company (2.59 per cent), Millenium Mauritius 1 Ltd (1.03 per cent) and AIF Capital Telecom Infrastructure (1.03 per cent). After the issue, stake of PE investors would come down to 3.18 per cent, 2.39, 0.95 and 0.95, respectively. Other investors selling their part stakes are GS Strategic Investments, arm of Goldman Sachs which holds 1.03 per cent, hedge fund Eton Park's Anadale Ltd (1.03 per cent) and a unit of Japan's Nomura (0.52 per cent).

"The regulatory hurdles have hit the telecom industry very much, reflected in the proposed price of Bharti Infratel shares. The investors who had bought shares at Rs 220 apiece five years before can wait for a price rise after an year of the IPO launch. Also, the 10-15 per cent price movement at the time of listing will also bring benefits for them," said an investment banker involved with the IPO.

After the IPO, Bharti Infratel will have 188 crore outstanding shares.

At the maximum price of Rs 240 apiece, the company is valued at Rs 45,120 crore ($8.2 billion). In December 2007, when a clutch of investors bought stake in Bharti Inftratel, the company had informed the enterprise valuation had been agreed to be in the range of $10-12.5 billion.

Another PE major KKR had made an investment of $250 million in 2008.

However, PE fund managers believe concerns over the current price band have been overblown. "This is the best company in its industry and we are very much confident on Bharti Infratel's performance. Also, we are not in a hurry to exit the company," said one of the PE investors in Bharti Infratel.

A report from Edelweiss Securities said, "Based on FY12 Ebitda and the upper end of the issue price of Rs 240, the company is valued at an EV/Ebitda of 13 times." It is learnt that 13 times EBIDTA is less than global peers'.

The uncertainties over regulations, after the supreme court made its verdict on 2G licences, made telecom one of the worst sectors for PE investments. In recent past, no major deals have taken place in the Indian telecom space.

The talks of Anil Ambani-owned Reliance Communications (RCom) with PE majors, such as Carlyle and Blackstone, to sell its tower arm Reliance Infratel haven't borne fruit. RCom was looking for a valuation of Rs 15,000-20,000 crore for its 95 per cent stake in Reliance Infratel.

After the supreme court verdict on 2G licenses, PE deals in telecom have fallen drastically. The year 2011 witnessed six deals worth mere $50 million against six deals of $483 million in 2010.

In 2007, when Bharti Infratel received PE investments of $1 billion, the telecom sector witnessed the largest deals - 13 PE deals of $3.5 billion. The year 2008 also witnessed 15 deals of $1.4 billion, according to data from VCCedge.